Some elements of the loan are closely linked: for example, the amount paid, the duration, the interest rate applied, are all aspects that contribute to determining the installment to be paid.
So let’s talk about the duration of the loan and what are the criteria that contribute to a correct determination of the same. These criteria can be of three different types:
- Criteria linked to the applicant’s expectations (life plan, job prospects, etc.);
- Financial criteria, or assessments on the greater or lesser convenience in terms of financial opportunities;
- Criteria related to the sustainability of the installment, and therefore to the actual ability to be able to comply with the contractual commitments by the borrower, and which will be those that will have to be evaluated by the bank to decide whether to grant the requested loan or not.
Let’s face them in detail.
CRITERIA RELATED TO THE APPLICANT’S EXPECTATIONS
1. Anyone of us who found ourselves having to apply for a mortgage, or even to think about this possibility, will have asked the following question (or something similar): “up to what age will I have to pay the installment?”. We often do not think about it, but on this point, the attitude of people to “endure” or not the idea of having debt for long periods counts very much. Here, then, that for some it is almost natural to think about lighting a 20 or 30-year mortgage, for others it would be an unbearable prospect. Each of us, therefore, more or less consciously, sets a time limit on the possible duration of the loan, regardless of the fact that this can be consistent with the amount we want to ask and the installment we intend to pay.
2. The age of the applicant obviously has its weight on the choice of duration. Younger people will face the problem of the compatibility of the installment with the pension or of the possible succession.
3. Risk appetite: longer durations can be riskier, and not only if you choose a variable rate mortgage. Even if we are faced with an installment that does not change over time, in fact, a twenty-year or thirty-year commitment cannot ignore the continuity over time of certain conditions, personal or work, for example, which are more difficult to guarantee that a shorter time span, for example of 5 or 10 years
1. Very often when you think about your mortgage the main evaluations are: “which maximum rate can I afford?” , Or “How long do I want to pay off the loan?”. A little less frequent is instead a detailed analysis on what is the effect, in terms of interest to be paid, of a higher duration of the loan. Without wishing to enter this place in too complex arguments, it is necessary to remember a simple principle: the longer the duration of the loan, the longer someone will lend us money, and therefore the higher his remuneration. When we have extinguished the loan, as is logical, we will have paid the bank a much larger sum than what was paid to us, given by the sum of the entire capital (exactly the amount disbursed) and interest. If we increase the duration of the loan, the interest rate will rise and its percentage value with respect to the capital may also be very high. This concept applies in a non-linear way, and an increase in the duration of the loan could also have a more than proportional impact.
2. Once again it is necessary to think about taking into account the influence of the other elements of the loan: the choice of a fixed or variable rate and the level (high or low) of the rates at the time the contract is stipulated can have a considerable influence, even on the risk of the operation.
CRITERIA RELATED TO THE SUSTAINABILITY OF THE PAYMENT
Finally, it must be taken into account that the duration of the loan can, other things being equal, be decisive for the sustainability of the resulting installment. In fact, as we now know, the bank will evaluate, before granting us the loan, if the amount of the installment is compatible with our income.
If this is not the case, wanting to keep the amount of the loan unchanged and the type of interest rate applied, the variable on which to act will be precisely the duration: by extending it, the installment will be lowered, which could be decisive for obtaining the desired financing.
Obviously this would impact on the other aspects considered in the previous paragraphs: for example, one would have to accept to have a debt (often considerable) for a longer period of time and resign oneself to paying a share of interests higher than what would be necessary in the case of shorter duration of the mortgage.
THE COUNCIL OF MISTER BANKO
In summary, even if sometimes the choice on the duration of the loan is made in an instinctive and unreasonable way, it would be better to always dwell on all the implications , if we consider the importance and the impact that can have in the following years.